Edited version of private advice

Authorisation Number:1052293106515

Date of advice: 18 September 2024

Ruling

Subject: Income tax exemption - encouragement of a game or sport

Question

Is the association exempt from income tax under section 50-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as an association established for the encouragement of a game or sport under item 9.1(c) of section 50-45 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods:

Year ended 31 December 20XX

Year ended 31 December 20XX

Year ended 31 December 20XX

The scheme commenced on:

1 January 20XX

Relevant facts and circumstances

The association constitution was adopted on establishment of the association.

The association was subsequently incorporated under the relevant legislation in its country of origin.

The association is a registered not for profit society in its country of origin with income tax exempt status.

The offices of the association are located in an Australian state capital. All administration and management of the association is conducted from this office.

The association is not registered with the Australian Charities and Not for Profits Commission (ACNC).

The association has a substituted accounting period that ends on 31 December each year.

The purpose of the association is to promote amateur playing of the sport for recreation and entertainment.

The objects of the association are to promote and develop the sport within its regional jurisdiction. The association is bound by these objects to develop and implement a strategic development plan for the sport in consultation with funding bodies, coordinate arrangements for matches, tours, and tournaments for the representative teams of its members, and undertake other activities to promote the interests of the sport.

The association constitution prohibits the association from using its funds for the private pecuniary gain, apart from payment for remuneration or services at market rates, of its members.

Under the provisions of the association constitution the property or assets remaining after liquidation of the association must be held in trust for the future promotion of the sport or transferred to an organisation with similar purposes in the same regional jurisdiction.

Membership of the association is open to representative bodies interested in the sport within its jurisdiction that comply with its governance principles.

Each member body must appoint a delegate for representation as an association member.

The association is governed by an executive committee in accordance with the provisions of its constitution.

Under the provisions of the association constitution the governing committee has all the powers necessary for directing and supervising the business and affairs of the association.

In accordance with the constitutional provisions for financial reporting a balance sheet and the financial accounts of the association must be prepared and presented at each annual general meeting. The minutes of these meetings are to be kept by the general manager of the association.

Activities undertaken by the association in the relevant financial years included program activities associated with strategic planning, membership services, competition and tournament delivery, and facilitating participation in sport, developing sport related capabilities, and training in sports administration and sports related injury prevention and treatment in member jurisdictions.

Activities undertaken by the association in the relevant financial years were undertaken both in Australia and overseas. Significantly more activities were undertaken in Australia than any other one county.

The association has not been involved in any non-sporting or sport related activities.

The association Annual General Meetings for the relevant financial years were conducted in accordance with the substantive provisions in the association constitution. Annual financial statements were prepared and presented at each of these meetings.

Association expenses in the relevant financial years can be attributed to the administration and implementation of the program activities undertaken by the association. Any surplus funds for these activities were directed to other programs run by the association.

In each of the relevant financial years the association incurred more than 50% of its expenditure in Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 50-1

Income Tax Assessment Act 1997 section 50-45

Income Tax Assessment Act 1997 section 50-47

Income Tax Assessment Act 1997 section 50-70

Income Tax Assessment Act 1997 section 50-75

Charities Act 2013 section 12

Reasons for decision

Section 50-1 of the ITAA 1997 states:

The total ordinary income and statutory income of the entities covered by the following tables is exempt from income tax. In some cases, the exemption is subject to special conditions

The tables referred to in section 50-1 of the ITAA 1997 are contained in sections 50-5 to 50-45 of the ITAA 1997. A society, association or club established for the encouragement of a game or sport is listed at item 9.1(c) in the table in section 50-45 of the ITAA 1997. The society, association or club must meet the special conditions detailed in section 50-70 of the ITAA 1997, and the special condition in section 50-47 of the ITAA 1997.

An entity is therefore exempt from income tax as a society, association or club established for the encouragement of a game or sport if it:

•                     is a society, association, or club

•                     is established for the encouragement of a game or sport, and

•                     satisfies the special conditions.

A society, association, or club

The term society, association or club is not defined in the ITAA 1997. The term is therefore construed according to the ordinary meaning of the words.

In Douglas v. Federal Commissioner of Taxation 97 ATC 4722 reference was made by the court to the definitions contained in the Concise Oxford Dictionary for each of these terms. Society, association, or club was accepted by the court as referring to a voluntary organisation having members associated together for a common or shared purpose (at 4726).

In Pro-campo Ltd. v. Commr of Land Tax (NSW) 81 ATC 4270 the court considered the meaning of 'society, club or association'. The court stated at 4279:

In Theosophical Foundation Pty Ltd v. Commr of Land Tax (NSW) [1966] 67 SR (NSW)...Sugerman JA stated at 82:

A society, in the relevant sense, is a number of persons associated together by some common interest or purpose, united by a common vow, holding the same belief or opinion, following the same trade or profession, etc; an association'...

The meaning of "society" as the Oxford English Dictionary definition shows can be the equivalent of "association" and I do not think that any relevant distinction in nature exists between the two. It merely seems to have happened that some organisations are called "associations", others are called "societies" but no meaningful difference can be detected between the two...Although clubs can in some respects and in some instances be seen to be distinguishable by reason of their purposes from societies or associations, they nevertheless fall squarely within the dictionary definition of "society" set out above. In short the three words are describing bodies made up of groups of persons who have come together to implement common purposes and objects...

The meaning of society, association, or club as described above, emphasises a 'body of persons' and 'an organisation of people' with a 'common purpose'.

Application to your circumstances

The association is incorporated as an association under the relevant legislation in its country of origin. The association is comprised of representative bodies that are within its jurisdiction, interested in the sport, and comply with its governance principles.

The association is considered a society, association, or club.

Established for the encouragement of a game or sport

Game or sport

The ITAA 1997 does not provide a definition of what constitutes a game or sport for the purposes of section 50-45. Accordingly, the words should be given their ordinary meanings. Taxation Ruling TR 2022/2 Income tax: the games and sports exemption describes the circumstances in which the Commissioner will consider a society, association, or club to be established for the encouragement of a game or sport.

Application to your circumstances

A non-exhaustive list of activities that are considered 'sport' for the purposes of section 50-45 of the ITAA 1997 is given in Paragraph 27 of TR 2022/2. This list includes the sport.

Encouragement

As stated in paragraph 30 of TR 2022/2 'encouragement' is not a defined term and therefore takes its ordinary meaning. The ordinary meaning of encouragement (or the act of encouraging) has been described as stimulating by assistance or approval, including through direct or indirect means.

Paragraph 43 of TR 2022/2 states that 'direct or indirect activities that indicate the encouragement of a game or sport can include:

•                     forming, preparing, and entering teams and competitors in competitions

•                     co-ordinating activities

•                     organising and conducting tournaments

•                     improving the abilities of participants

•                     improving the standard of trainers and coaches

•                     providing purchased or leased facilities for the activities of the game or sport for the use of club members and visitors

•                     encouraging increased and wider participation and improved performance

•                     marketing

•                     initiating or facilitating research and development, and

•                     facilitating the activities listed in this paragraph by making a financial or in-kind contribution to an organisation that performs them.

Application to your circumstances

The association has undertaken a range programs and activities that are aligned with its purpose of promoting the sport for the recreation and/or entertainment of the general public. These activities all fall within the ordinary meaning of encouragement as described in TR 2022/2.

Special conditions

Section 50-70 of the ITAA 1997

Subsection 50-70(1) of the ITAA 1997 states that an entity covered by item 9.1 is not exempt from income tax unless the entity is not carried on for the profit or gain of its members (not-for-profit requirement) and it has a physical presence in Australia and, to that extent it pursues its objectives and incurs its expenditure:

•                     principally in Australia

•                     it is a deductible gift recipient, or

•                     it is prescribed by law in the income tax regulations and it is located outside Australia and is exempt from income tax in its country of residence.

Non-profit requirement

TR 2022/2 states the following about the non-profit requirement:

11. To qualify for the games and sport exemption, a club must be not-for-profit... The club must not be carried on for the purposes of individual members' profit or gain, either while the club is operating or on its winding up.

12. Club members may receive communal membership benefits, such as the use of the facilities, that are incidental to the club's objects. This will not prevent the club meeting the not-for-profit requirement. The club may also pay members reasonable remuneration for services they perform for the club.

13. Clubs can use various mechanisms to ensure they meet the not-for-profit requirement. 'Not-for-profit' clauses in governing documents are the most common way. These prevent the distribution of profits or assets for the benefit of particular persons while the club is operating and on winding up

Application to your circumstances

The association constitution prohibits the association from using its fund for private pecuniary gain. On liquidation of the association surplus property or assets must be used for the future promotion of the sport or transferred to an organisation with similar aims in the same regional jurisdiction.

The association is not carried on for the profit or gain of its members.

Has a physical presence in Australia and, to that extent it pursues its objectives and incurs its expenditure principally in Australia

The meaning of physical presence in Australia for the purposes of section 50 of the ITAA 1997 is defined in paragraphs 52 and 53 of Taxation Ruling TR 2019/6 Income tax: the 'in Australia' requirement for certain deductible gift recipients and income tax entities. Consideration of the extent to which an entity pursues its objectives and incurs its expenditure principally in Australia is discussed in paragraphs 54 to 69 of TR 2019/6.

In determining these matters the objectives and activities undertaken to achieve these objectives must be identified. The degree to which objectives are pursued and expenditure is incurred in Australia can be determined by comparing the facts, and each case will turn on its own facts.

In discussing whether an entity has a physical presence in Australia and is pursuing its objectives and incurring expenditure in Australia TR 2019/6 also states in paragraph 57:

Where an entity has a physical presence both in Australia and overseas only the expenditures incurred and objectives pursued which are attributable to that entity's physical presence in Australia are examined.

As discussed in paragraphs 70 to 73 of TR 2019/6 the focus of any assessment of whether an entity is pursuing its objects and incurring expenditure principally in Australia will be on a year-by-year basis. The weight given to this assessment for any one year may be reduced where expenditure for that year is unusual, arising, for example, from a mistake or circumstances that are beyond the entity's control. In such a case, evidence of past or intended expenditure may be taken into account.

Paragraphs 74 to 79 of TR 2019/6 discuss amounts to be disregarded under section 50-75 of the ITAA 1997 when determining whether an entity pursues its objectives and incurs expenditure principally in Australia. These amounts include expenditure from grants made by government for specific purposes, gifts, or the proceeds of a registered deductible gift recipient operated by an entity are disregarded. Where an entity distributes amounts from these sources overseas they will not be taken into account in determining whether it satisfies the requirement that it pursues its objectives and incurs expenditure principally in Australia.

As noted in paragraph 79 of TR 2019/6 entities must maintain records clearly identifying the source of these amounts, and where expenditure is considered to have been incurred overseas this treatment must be aligned with any conditions attached to the gift or grant.

Physical presence in Australia

As stated in paragraph 53 of TR 2019/6 'an entity has a physical presence in a place where it employs assets or people to conduct its range of physical operations'.

Application to your circumstances

The association maintains offices in Australia and all management and administration is conducted from those offices by the executive committee and a general manager employed for that purpose.

The association has a physical presence in Australia.

Pursues objectives

An entity usually pursues its objectives in the place where it seeks to realise its purposes. In determining where an entity principally pursues its objectives the nature of the entity's activities must be established based on the facts of the case. An entity undertaking some of its activities in Australia is not necessarily pursuing its objectives in Australia.

Application to your circumstances

Activities undertaken by the association in the relevant financial years included program activities associated with strategic planning, membership services, competition and tournament delivery, and facilitating participation in sport, developing sport related capabilities, and training in sports administration and sports related injury prevention and treatment in member jurisdictions. Significantly more of these activities are undertaken in Australian than any other one country.

The association principally pursues its objectives within Australia.

Incurs expenditure

In determining where an entity principally incurs its expenditure the nature of the expenditure must be established in each case. Expenditure will normally be considered to have been incurred in Australia where the decision to make the payment is made in Australia from a source such as an Australian financial institution.

An entity can also pursue its objectives and incur expenditure in Australia by making distributions to other entities or supplying goods and services in Australia.

Application to your circumstances

The association incurred more than 50% of its expenditure in Australia in the 2021, 2022, and 2023 financial years.

The association has incurred its expenditure principally in Australia in these years.

Subsection 50-70(2) of the ITAA 1997 provides that the Association must:

•                     comply with all the substantive requirements in its governing rules, and

•                     apply its income and assets solely for the purpose for which the entity is established.

Complies with substantive requirements in its governing rules

Taxation Ruling TR 2015/1 Income tax: special conditions for various entities whose ordinary and statutory income is exempt provides guidance in respect of the conditions in subsection 50-70(2) of the ITAA 1997. Paragraph 9 of TR 2015/1 provides that an entity's 'governing rules' are those rules that authorise the policy, actions and affairs of the entity. Paragraphs 18 and 19 of TR 2015/1 explain that the substantive requirements in an entity's governing rules are those rules that define the rights and duties of the entity and include rules such as those that:

•                     give effect to the object or purpose of the entity

•                     relate to the non-profit status of the entity

•                     set out the powers and duties of directors and officers of the entity

•                     require financial statements to be prepared and retained

•                     set out the criteria for admission as a member of an entity

•                     relate to the winding-up of the entity.

Application to your circumstances

The association has complied with the governing rules set out in its constitution in its conduct of meetings throughout the years ending 31 December 2021, 2022, and 2023. There is no evidence of any activity undertaken by the association that is inconsistent with these governing rules in these years.

Apply its income and assets solely for the purpose for which the entity is established

In discussing how to determine whether an entity has applied its income and assets solely for the purpose for which it is established TR 2015/1 describes the factors to be taken into account in determining that purpose. The main factors to be considered are the objects given in the entity's constituent documents and the activities of the entity. Other factors that may also be considered include policies and plans, administration, finances, history and control, and any legislation governing the operation of the entity.

Application to your circumstances

The purpose of the association is outlined in its constitution as being to promote the sport for the recreation and/or entertainment of the general public. The constitution defines the objects of the association as promoting and developing sport within its regional jurisdiction.

All the activities undertaken by the association in the relevant years ending implement or support that purpose and the objects listed in the constitution. The expenses of the association were all directed to these ends in these years.

The association has applied its income and assets solely for the purpose for which the entity is established.

Section 50-47 of the ITAA 1997

Section 50-47 of the ITAA 1997 provides a special condition for all entities covered by section 50-1 of the ITAA 1997. An entity that can be registered as a charity with the Australian Charities and Not-for profits Commission (ACNC) is an 'ACNC type of entity'. The Charities Act 2013 (CA) sets out the requirements to be a charity. Section 12 of the CA provides purposes that are a 'charitable purpose' and includes purposes such as advancing health, education, social or public welfare, religion, and culture. A purpose of advancing sport is not included in this list.

Application to your circumstances

The promotion of sport is not a charitable purpose and the association is not an ACNC type of entity. Section 50-47 of the ITAA 1997 will not apply in this case.

Conclusion

Yes, the association falls within the meaning of an association established for the encouragement of a game or sport under item 9.1(c) of the table in section 50-45 of the ITAA 1997, and meets the conditions set out in section 50-70 of the ITAA 1997.

The association is not an ACNC type of entity and section 50-47 of the ITAA 1997 will not apply in this case.

As your constitution and the activities you undertake may change from year to year you should evaluate your status on a regular basis and seek further advice on this matter if there are substantial changes in the nature or character of your association.